SHORT NOTES

Unit 01 – Accounting & it’s importance

MAIN OBJECTIVES OF ACCOUNTING

Financial - To provide general purpose financial statements to stakeholders for

decision making (specially for existing and potential investors, lenders and other
creditors)
Management - To provide Specific purpose managerial information to managers for
decision making

SEQUENTIAL ORDER OF ACCOUNTING

Transactions take place

Source Documents are prepared

Prime entry books are prepared

Posted to Ledger Accounts

Preparation of Trial Balance

Financial Statements

Differences between Financial Accounting and Management Accounting

Financial Management
Purpose General purpose  specific purpose
Users Internal & External Internal only
Legal requirement compulsory  not compulsory
Reporting frequency  Annually On demand
Nature of information Historical Present and forecasted

Legal
Technological
Technical & Professional Environmental factors of Accounting
 Social & Cultural
Political & Economic

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 Accounting Elements - Assets, Liabilities, Equity Expense, Income,

Main Elements Sub Elements

Components of financial statements

Statement of profit or loss - Net profit
SOFP – financial position
Cash flow statement – Changes in financial position
Statement of Changes in equity
Accounting notes

Measurement basis of Accounting Element

1) Historical cost
2) Current Cost
a) Fair Value (the present market value)
b) value in use and fulfillment value
(Value in use - The use you gain without selling the asset)
c) Current cost

Qualitative Characteristics

Fundamental Enhancing/improvable

Relevance - Predictive value Timelines

Confirmatory value Verifiability
Materiality Understandability
Comparability
Faithful representation - Completeness
Neutral

Main Underlying Assumption

Going concern

New trends of accounting

Computerized Accounting
Human Resource Accounting
Environmental Accounting
Inflationary Accounting
Social Responsibility Accounting

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 Unit 02 - Accounting equation
A (Final Accounting
= equation) E + L Basic Accounting equation

(+) (-)
Add Capital/ Income Drawings/ Expenses

A + E = Eq + I + L Final Accounting equation

Profit equation/ Net asset approach

Profit/Loss = NA1 - NAo + D - AC
Profit/Loss = Increase in net assets + D - AC

Increase in net assets = Increase in Assets – Increase in Liability Equity

Capital = Net Assets

Capital Retained
How to record VAT under accounting equation  only add. Earning
Ex-; Credit purchases Rs.230,000 (including 15% VAT) capital Drawings
A = E + L Income
+200,000 (stocks) +230,000(creditors) Expenses
+30,000 (VAT receivable)

Ex-; Credit sales Rs.230,000 (including 15% VAT) cost of these goods 180,000
A = E + L
-180,000 (stocks) +20,000(profit) +30,000 (VAT payable)
+230,000 (debtors)

How to record EPF under accounting equation

A = E + L
( - ) Net salary (-) employee related total (+) EPF (employer + employee)
expense

Mark up (profit on cost) and Margin (profit on Selling price)

Ex-: Selling price 240,000 (profit 20% on cost)

Cost + profit = Selling price
Meaning of 20% on cost is 100 + 20 = 120

To find cost = 240,000 x 100 To find profit = 240,000 x 20

120 120

Ex-: Cost 160,000 (profit 20% on selling price)

Cost + profit = Selling price
Meaning of 20% on selling price is 80 + 20 = 100

To find selling price = 160,000 x 100 To find profit = 160,000 x 20

80 80

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Unit 03 Double entry system
A + E = C + I + L

Increase Debit Increase Credit

Decrease Credit Decrease Debit

Type of account

Provision for depreciation and provision for doubtful debts - Asset Account
Sales return - Income account
Purchase return – Expense account
Retained earnings –equity
Accrued expense - Liability
VAT account - Asset /Liability
Prepaid expense - Asset
Provision for warranty – Liability
Provision for gratuity - Liability
Income received in advance- Liability
Subscription - Income account
Income receivable - Asset
Life membership- liability
Accumulated fund - Equity
Drawing - Equity

Double entries which use frequently

 credit sales - Debtors control Dr

Sales Cr
Credit purchases – Purchases Dr
Creditors control Cr
 Sales Return - Sales Return Dr
Debtors control Cr
Purchase Return - Creditors control Dr
Purchase Return Cr
 Discount Received - Creditors control Dr
Discount Received Cr
 Discount Allowed - Discount Allowed Dr
Debtors control Cr
 Bad debts - Bad debts Dr
Debtors control Cr
 Doubtful debts - Doubtful debts Dr
Provision for Doubtful debts Cr
 Depreciation - Depreciation Dr
Provision for Depreciation Cr
 Closing stock - Closing stock Dr
Cost of sales Cr
Goods drawings - Drawings Dr
Purchases Cr
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Unit 04 – Prime entry books (Chronological book of Accounts)

SR Transaction Source document Prime Entry Book

NO
1 Cash Receipts Receipt Cash Receipt Journal
2 Cash payments Payment Voucher Cash Payment Journal
3 Credit sales - (Goods ) Sales Invoice Sales Journal
4 Credit Purchase – (Goods) Purchase Invoice Purchase Journal
5 Sales returns Credit Note Sales return Journal
6 Purchase returns Debit Note Purchase return Journal
7 Petty cash transactions Petty Cash Voucher Petty Cash journal
8 All other transactions Journal Voucher General Journal
 Opening entries (A & L)
 Closing entries (I & E)
 Rectification of errors
 Purchase of NCA on credit
 Sale of NCA on credit
 Dishonored cheques

List Price = 8 000 (Trade discount 10%)

Invoice Price = 7 200 should be recorded in purchase journal (Always after deducting trade
discount)

If cash discount of 10% is received when settlement by cheque, double entry

Creditor Dr 7200
Cash Cr 6480
Discount received Cr 720

If this cheque is returned by the bank

Cash control Dr 6480

Discount received Dr 720
Creditor Cr 7200

If cheque issued for payment an expense returned by the bank

Cash control Dr xx
Accrued expense Cr xx

Credit purchases with VAT

Purchase Dr xxx (excluding vat) Income statement

Vat control Dr xxx (vat amount) asset
Creditors control Cr xxx (including vat)

Credit Sales with VAT

Debtors control Dr xxx (including vat)
Vat control Cr xxx (vat amount) Liability
Sales Cr xxx (excluding vat) Income statement

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Petty cash imprest/ Float – total amount given to petty cashier

Reimbursement - amount given by the main cashier to refill petty cash imprest

Format of a Cash Receipt Journal

Date Receipt No Description Discount Amount Analysis Columns VAT

Allowed Sales Debtors Income Other

xxxxx xxxxx xxxxxx xxxxxx xxxx xxxx

Discount Allowed Dr. Exp.

Debtors Control Cr. Assets (Asset ) Cash Control Account Dr
(Income ) Sales Cr.
(Asset ) Debtors control Cr.
(Income ) Income Cr.
( Liability ) VAT control Cr.

Format of a Cash Payment Journal

Date Payment Description Discount Amount Analysis Columns VAT

No Received Purchases Creditors Expenses Other

xxxxx xxxxx xxxxxx xxxxxx Xxxx xxxxx

Creditors Control Dr.
Discount Received Cr. (Expense ) Purchase Dr.
(Liability ) Creditors Dr.
(Exp. ) Other Exp. Dr.
(Asset ) VATcontrol Dr
(Asset ) Cash Control Cr.

Format of a Petty Cash Journal

Date Voucher Descripti Ledger Amount Analysis Columns

No on Folio Postage Stationery Cleaning Other Ledger
(Creditors)

xxxxx xxxxxx xxxxxx xxxxx xxxxxx

Petty Cash Imprest is given by the main Cashier: Stationery Dr. xxxx
Postage Dr. xxxx
Petty Cash Control Dr. xxxx Cleaning Dr. xxxx
Cash Control Cr. xxxx Other Dr. xxxx
Ledger (Creditors) Dr. xxxx
Petty Cash Control Cr. Xxxx

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Format of a Purchase Journal

Date Invoice No Suppliers Name Excluding VAT VAT(15%) Including VAT

1/20 001 Nimal 200 30 230

200 30 230

Purchase Dr. Creditors Control Dr.

 Credit Purchase of Goods VAT Dr. (Assets)
(Including VAT) (Expense ) )
 (
Format of a Purchase Return Journal

Date Debit Note No Customers Name Excluding VAT VAT(15%) Including VAT

1/25 002 Nimal 50 7.5 57.5

50 7.5 57.5

Purchase Return Cr. (E) VAT Cr. (Assets ) Creditors Dr. (L )

Format of a Sales Journal

 VAT Column is needed only if the Business is a PLC or VAT registered only

Date Invoice No Customers Name Excluding VAT VAT(15%) Including VAT

Amal 300 45 345

300 45 345

Sales Journal
Credit Sales of Goods Sales Cr.(I) VAT Cr.(L) Debtors Control Dr
(Asset)

Format of a Sales Return Journal

Date Credit Note No Customers Name Excluding VAT VAT(15%) Including VAT

Amal 100 15 115

100 15 115

Return Dr Sales Cr. VAT Dr.(c) Debtors Cr.(A)

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General Jouurnal

BANK RECONCILIATION
Causes for differences
Errors of Omission (standing order,bank charges,direct deposit)
Arithmetic Errors
Errors of Timing differences (Un-presented &unrealized)

Bank Balance 50 000 Bank Balance 30 000

Bank Statement Balance 30 000 Bank Statement 50 000

Reasons Reasons
Deposited dishonored cheques Issued dishonored cheque
Unrealized cheques Unpresented cheques
Bank charges Direct remittance
Standing orders

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Error correction
Trial Balance - The Statement which shows mathematical accuracy of the accounting
process

 if same amount has debited and credited to two accounts it is not affected to the trial
balance

Error types - Omission

Under casting
Over casting
Principle (Different category different account)
Duplication not affected to trial
Compensation balance
Commission (Same category different Account)

General Ledger – The record which include all the type of ledger accounts (except debtors
and creditors personal accounts)

Profit Correction statement

When preparing Net profit correction statement

If Income or expense account Cr , It should be added (+) to the NET PROFIT

If Income or expense account Dr , It should be Deducted (-) from the NET PROFIT

When Income account Cr Income Increase Profit Increase

When Income account Dr Income Decrease Profit Decrease
When Expense account Dr Expense Increase Profit Decrease
When Expense account Cr Expense Decrease Profit Increase

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Control Accounts

Transactions and Events

In Total Daily
Source documents
To the General Ledgers in To subsidiary ledgers in
the double entry system the single entry system
Prime Entry Books

Debtors Control A/c

xx Debtors Ledger Creditors
Ledger

A P

Creditors Control A/c

xx

B Q
All other accounts

C R
Sales

List of Debtors Balances List of Creditors Balances

Purchases A x P x
B x Qx
C x Rx
x x

Comparing list of balances

Trial Balance

Financial Statements

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 Debtors Sub Ledger and debtors Control Account

Original documents

Transactions and Events related to Debtors

Books of Prime Entry

Double Entry in the Debtors Ledger
General Ledger

Sales Journal Debtors a/c - Debit

Debtors Control A/c - Debit
Returns Inwards Journal Debtors a/c - Credit
Sales A/c - Credit
Cash Receipts Journal Debtors a/c - Credit
General Journal Debtors a/c - Credit

Returns Inwards A/c - Debit

Debtors Control A/c - Credit

Cash Control A/c - Debit

Debtors Control A/c - Credit

Discount allowed A/c - Debit

Debtors Control A/c - Credit

Debtors Control A/c - Debit

Creditors Control A/c - Credit

Bad Debts A/c - Debit

Debtors Control A/c - Credit

Debtors Control A/c Balance Comparison List of balances of Debtors

Debtors Balances Reconciliation Statement

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Unit 05 – Accounting concepts
ASSETS
Results of a past transaction
Controlled by the business
Present economic resource

LIABILITY
Result of a past transaction
Present obligation
Transfer an economic resource

Equity
Equity is the residual interest in the assets the entity after deducting all its liabilities.

Similarity and difference between Liability and Equity

Similarity - As a result of a past transaction or an event
Difference – Equity represent obligation to the owner, Liability represent obligation to
external parties

Income
Increases in assets or decreases in liabilities that result in increases in equity, other than those
relating to contributions from holders of equity claims.

Expenses
Decreases in assets or increases in liabilities that result in decreases in equity, other than
those relating to distributions to holders of equity claims.

RECOGNITION CRITERIAS ( Accounting Elements)

 Relevant information about the asset or the liability and about any income ,expense or
changes in equity
A faithful representation of the asset or the liability and of any income, expenses or
changes in equity
It should comply with the definition

BUSINESS ENTITY
Business Name
Drawings (deducting from equity)
Capital in liability side

GOING CONCERN
Assets and liabilities classified as current & non-current
Basis for depreciation

PERIODIC CONCEPT
Mentioning Accounting period
 I/S for the year ended
 SoFP as at

MONEY MEASUREMENT
Under this concept, business transactions which can be measured using the currency unit are
recorded

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 Eg: ‘RS’
Non recognition of Employee Competency in Finance Statement

ACCRUAL CONCEPT – Paid or not the relevant amount for the period should be
recorded
Accrued expenses
Receivable income
Received in advance
Debtors, Creditors
Pre-payments

SUBSTANCE OVER FORM

consider Economic substance rather than legal aspect
Leasing
Lease faithful representation ( relevant qualitative feature)

MATCHING CONCEPT
Income should be matched with relevant expense portion
Recognition of cost of goods sold as an expense and year end inventory as an asset
deduct cost of Sales from sales to compute gross profit
preparing income statement (all expenses recorded in I/S)

*Cost- Monetary value of resource used to production (production cost)

* Expense- Cost of goods used to earning revenues

PRUDENCE CONCEPT
All the provisions are made based on this concept.
 Stock valued at lower of cost or NRV. (Historical cost concept is violated due to this
principle)

CONSISTENCY CONCEPT
Maintaining same accounting policies
Eg: Use FIFO method to issue inventory each year
Maintaining same accounting policies comparability ( relevant qualitative feature)

MATERIALITY CONCEPT
The materiality mans the importance of an item recorded separately in the financial
statements
Eg: Stapler Machine, loose tools

HISTORICAL COST CONCEPT

Assets should always be valued at historical cost (due to this relevance feature is violated).
Revaluation
Inventory Valuation at lower of cost or NRV violated historical cost concept
Realization Concepts

 Recognize credit sales as an income

Sales in advance recognize as a liability

Disclosure Concepts
All accounting practices used must be disclosed.
Eg ; Inventory issuing method

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Unit 06 – Sole trader Adjustments

 Accrued Expenses - Relevant Expense Dr

Accrued Expense Cr

 Prepaid Expenses - Prepaid Expense Dr

Relevant Expense Cr

 Income Receivable - Income Receivable Dr

Relevant Income Cr

 Income Received in Advance - Relevant Income Dr

Income Received in Advance Cr

 Goods in Transit - Closing stock Dr

Cost of sales Cr

 Closing stock adjustment - Closing stock Dr ( lower of cost or NRV )

Stock written off Dr (difference between cost and NRV)
Cost of sales Cr (Always Cost)

 Stock damages with an insurance claim - Insurance Receivable Dr

Stock loss Dr
Purchases Cr
Stock sent on Sale or Return basis
Eliminate sales entry from the books (when recorded as sales but not sold)
Sales Dr
Debtors control Cr
Added to closing stock
Closing stock Dr
Cost of sales Cr

 Stock sold but not collected - Cost of sales Dr

Closing stock Cr

 Advances on Sales – Sales Dr

Sales in Advance Cr

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Unit 07 – Manufacturing Accounts
 DM + DL + DO = PRIME COST
 DM + DL + DO + POH = Manufacturing cost/ product cost /production cost
 DM + DL + DO + POH + Non production overheads = TOTAL COST
 DL + DO + POH = Conversion cost
 production overhead + non production overheads = Total overheads
 DM + Conversion cost + non production overheads = Total cost
 Prime cost + Total overheads = Total cost
 Total Direct cost + Total indirect cost = Total cost
 Prime cost + Total overheads – Non manufacturing cost = manufacturing cost
Prime cost + variable production overhead + fixed production overhead = manufacturing
Cost
Cost of Sales = DM + DL + DO + POH + Finished goods

How to adjust Increase or Decrease in Stocks

Increase in Inventories
Raw material
Work in progress ( - ) manufacturing Account
Finished goods

Decrease in Inventories
Raw material
Work in progress ( + ) manufacturing Account
Finished goods

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Unit 08 – Non profit Organizations
Differences
Receipts & Payments I&E
Basis Cash basis Accrual Basis
Purpose To find the cash balance To find surplus or deficit

ACCOUNTING FOR LIFE MEMBERSHIP

Treat it as an income in the year in which life membership were received

Treat it as a liability and a transfer agreed amount to income and expenditure account
Treat it as a direct increase in accumulated fund

Closing accumulated fund

AF closing = Closing Assets - Closing liabilities
AF closing = AF opening + Surplus
Surplus = AF1 - AF0

Special fund
R&P Dr xx
Building fund Cr xx

When it is used for construction

 Building Dr xx
R&P Cr xx

 Building fund Dr xx
Accumulated fund Cr xx

Subscription Account
Openin Arrears Xxxx Opening advance xxxx
Income and Expenditure xxxx Receipts and Payments xxxx
Subscription w/off xxxx
Closing advance xxxx Closing Arrears xxxx
xxxx Xxxx

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Unit 10 - PARTNERSHIP
Section 24
Profits equally
No salaries
No interest on capital
5% interest on additional loan

Section 42 – 5% interest on retired partners loan

GOODWILL CALCULATION Expense incurred by a partner on

Behalf of the partnership
1.Admission of a partner  Expense Dr
2.Retirement of a partner partners current a/c Cr
3. When partnership agreement change when Reimburse
 partners current a/c Dr
New profit sharing ratio Cash Cr

A B C
Old 2 1
3 3

New 4 X 2 4 X 1 1
5 3 5 3 5

8 4 3
15 15 15

8 : 4 : 3

Goodwill Double entry

Capital a/c Dr (new profit sharing ratio)

Capital a/c Cr (old profit sharing ratio)

Equity of a Partnership = Capital Balances + Current Balances + Other Reserves if

Available

Increase in Equity = Closing Equity – opening Equity

Closing Equity = Opening Equity + Net profit + Additional capital + other entitlement
for partners (Loan interest, Rent) - Drawings

Special profit calculation method for partnership

Profit = Salaries + Interest on Capital + Profit shares

Total profit distributed to a partner = Salary + interest on capital + profit share

Total Income distributed to a partner = Salary + interest on capital + profit share + Loan
interest and other entitlements

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Unit 11 – Accounting standards

In preparing and presenting financial statements of specified Business enterprise

should follow Sri Lanka Accounting Standards recommended by Sri Lanka Accounting
and Auditing Standards Act No. 15 of 1995.

 Two statutory bodies that have been established under the Sri Lanka Accounting
and Auditing standards act No. 15 of 1995
1) Sri Lanka Accounting Standards Committee
2) Sri Lanka Auditing Standards Committee

Incorporation of Sri Lanka Accounting Standards Committee according to Sri Lanka

Accounting and Auditing Standards Act No. 15 of 1995.
The Sri Lanka Accounting and Auditing Standards Monitoring Board has the power to
examine whether the Sri Lanka Accounting Standards have been adhered to in
preparation of accounting statements of a specified business enterprises, and to take
necessary action if the standards have not been adhered to.

Functions of Institute of Charted Accountants of Sri Lanka.

 Organizing exams in order to provide related qualification and relevant
educational courses
 Controlling and supervising of student education and training.

Conceptual framework
A set of rules which helps to make functions and limitations of financial accounting and
financial statements are known as conceptual framework.
Objectives of financial Statements
The objectives of general purpose financial statements to provide financial information
about the reporting entity that is useful to existing and potential investors, lenders and
other creditors in making decisions about providing resources of the entity

Accounting Standards
Various professional Institutes provide rules to be followed by organizations in preparing
financial statements are known by Accounting Standards or required rules to be followed
in recognizing, measuring and presenting transactions. The Institute of Chartered
Accountants of Sri Lanka is the authorized institute in Sri Lanka.

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 LKAS 02 - inventory
INVENTORIES
Held for sale in the ordinary cause of business (Finish goods)
In the process of production for such sale ( work in progress) or
In the form of materials or supplies to be consumed in the production process (raw
materials)

COMPONENTS OF COST OF INVENTORY

Purchase cost
Conversion cost (Direct labour, direct other, production overhead)
Other cost(incurred in bringing the inventories to their present location and condition)

Excluded cost from inventory valuation (2019A/L)

overhead selling costs
abnormal amounts of wasted material, labourand other production cost
general administrative overheads
Storage costs

NRV = Estimated selling price – (Estimated cost of completion + Estimated selling expenses)

ACCEPTED COST FORMULAS UNDER LKAS -02

FIFO
WAC

METHODS OF DETERMINATION Net Realizable Value

Item by item basis
group basis
Recognition of inventory as an expense
 At the time of selling inventories
 If there is a stock loss (when NRV of inventory is lower than it’s cost)

DISCLOSURES OF INVENTORY ( included in notes)

 NRV determination method (Item by item basis, group basis)
 Cost formula (FIFO, WAC)
Inventories kept as securities
stock losses

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 LKAS 07 – Cashflow
Cash and cash equivalents - Cash
Bank
Treasury Bills and short term investments less than 3
months
Working capital relationship

Current assets negative Cashflow

Current Liability positive Cashflow

Following items have to be adjust twice when preparing indirect method cashflow statement

Interest expense
Interest income
Dividend income
Rent income
Disposal proceed and gain/loss

Format of a Retained Earnings account

Retained Earnings
Dividend paid xx BBF xxx
Transfer to G/R xx Profit for the year xxx
Bonus issue using R/E xx
BCD xx
xx xx

Format of a Property plant and equipment account (at cost)

Property plant and equipment account (at cost)

BBF (Cost) xxx Disposal (cost) xx
Revaluation Gain xx Dep.on revaluation xxx
Aquisitions xx BCD (Cost) xx
xx xx

Format of a provision for Property plant and equipment account

Provision for Property plant and equipment account (at cost)

Dep.on revaluation xxx BBF xxx
Disposal xx Annual Depreciation xxx
BCD xx
xx xx

Format of a Property plant and equipment account (at NBV)

Property plant and equipment account (at NBV)

BBF (NBV) xxx Disposal (NBV) xx
Revaluation Gain xx Depreciation xxx
Aquisitions xx BCD (NBV) xx
xx xx

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 LKAS 08
Accounting Policies
Accounting policies are the specific principles, bases, conventions, rules and practices
adopted by an enterprise in preparing and presenting financial statements.

Selecting Accounting Policies

There are two ways of selecting an accounting policy.
 If an accounting standard is clearly applied to a transaction or an event. The
accounting policy should adhere to the standard.
Eg -: FIFO or WAC as per LKAS 02
 In the absence a recommended accounting policy.
(The management of the entity should develop an appropriate accounting policy.

What is change of accounting policies?

Change in recognition, measurement and presentation.
Why accounting estimate?
Inherent uncertainties in business activities.
Many items in the financial statements are to be estimated since they can’t be measured
with accuracy.

Changes in accounting estimates

It is an adjustment of the carrying amount of an asset or a liability or the amount of the
periodic consumption of an asset. That results from the assessment of the present status
and expected future benefits and obligations associates with assets and liabilities.

Errors
Errors in financial statements can arise on account of incorrect recognition, measurement,
presentation or disclosure of items in financial statements. (Mainly focus on prior period
errors)
LKAS - 08

Accounting Accounting Fundamental

Estimates Policies Errors

Eg: Residual Value Eg: inventory policy (FIFO/WAC)

Income tax Item by Item/Grouping method Eg: last year closing
Depreciation% using cost model or revaluation stock under stated
Depreciation method model for subsequent measurement Adjust
Useful life opening balance R/E A/c
Doubtful Debts (retained earnings)
N.R.V Change due to (Retrospective Restatement)
Change due to - if Required by LKAS
New environment changes - For more reliable presentation
New information or experience Adjust
Past, Present & Future, Financial Statement
Adjust (Retrospective Application)
Present & Future
Period Financial Statement (prospective Application)

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Example with workings
The following balances of Isuru PLC are given:

Provision for product warranty as at 01.04.2018 - Rs. 12 000

Sales for the year ended 31.03.2019 - Rs. 900 000

The company offers one year product warranty. Amount equal to 10% of current year sales
are expected to incur as repairing expenses for the faculty products sold during the year under
warranty. Repair cost incurred during the year Rs. 40 000 for current year sales. Previous
year warranty has expired.

Required:
i. State the accounting treatment for previous year balance of the warranty provision
with reference to the LKASs.
ii. Show the financial statement extract for the year ended 31.03.2019

Answer
i) Previous year balance should be excluded from distribution expenses. (as it has already
been expired)
ii) I/S extract Distribution expense
Last year over provision (12,000)
Current year provision 90,000

SOFP extract Current liability

Provision for warranty 50,000

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 LKAS 10
Events after reporting period
“Are those events, favourable and unfavourable that occur between the end of the reporting
period and the date when the financial statements are authorized for issue

adjusting events
Those that provide evidence of conditions that existed at the balance sheet date (b)Those

Non adjusting events

that is indicative of conditions that arose after the balance sheet date

2019/05/25
2017/4/1 2019/03/31
Directors authorized date

Events occurring after the balance sheet date

Adjusting Events Non-adjusting events

Accounting treatment Accounting treatment
Should be adjusted in current year financial statement Should be Disclosed as a note
Eg-: Eg-:
Bankruptcy of a debtor who owed substantial Discontinued operations
amount at the balance sheet date Proposed dividend for O/S
Sale of inventory lower than cost at 31.03.2019 Assets destroyed due to fire
Decision of a court case delivered on 30/04/2019 Declining market value of
confirming employee compensation. (court case should Investments
be filed before balance sheet date)
Actual value of an asset purchased during the  A part of a building taken over by
accounting period was decided after the reporting period. the government after reporting
period
Disclosure requirement
Date of authorization for issue
The person who authorizes
Discloses the situation as at the end of the period
Nature of non adjusting events

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 LKAS 16
PPE
Are held for use in the production or supply of goods or services or for rental to others or for
Administrative purpose
Are expected to be used during more than one period

Cost
Cost is the amount of cash or cash equivalents paid or the fair value of other
consideration given to acquire an asset at the time of its acquisition or construction or,
where applicable, the amount attributed to that asset when initially recognized in
accordance with the specific requirements.

Depreciation
Depreciable amount is the cost of an asset or other amount substituted for cost, less its
residual value.

Carrying amount
Carrying amount is the amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairments losses.

Fair value
Fair value is the amount for which an asset could be exchanged between knowledgable,
willing parties in an arm’s length transaction.

Residual value
The residual value of an asset is the estimated amount that an entity would currently
obtain from disposal of the asset, after deducting the estimated costs of disposal, in the
condition expected at the end of its useful life.

Useful life
Useful life is the period over which an asset is expected to be available for use by an
entity or the number of production or similar units expected to be obtained from the asset
by an entity.

Except land other assets Depreciable asset

Disclosures
 Depreciation Method used
 Useful life
 Dep. Rate
 Property kept as a security

Cost components
Initial Purchase Price
(+) Installation
(+) Initial Testing
(+) Legal Fees
(+) VAT
(+) Cost of removing unwanted constructions

Lakshitha Rathnayake Page 24

(-) Trade discount
(-) Subsidies
(-) Income from removing unwanted constructions
(-) Income from initial testing

PLC VAT REGISTERED COMPANY

 Initial purchasing price - VAT should not be included if it is a VAT Registered

Company
 If company is not registered for VAT – VAT should be added to the cost

Examples of excluded cost

 cost of opening a new facility or business ( opening ceremony)

 Costs of introducing a new product or service (including cost of advertising and
promotional activities) 2019A/L
costs of conducting business in a new location or with a new class of customer(including
cost of staff training)
Administration and other general overhead costs

The disposal of an asset/Exchange of Fixed Assets

1 Eliminate the cost value of the disposed asset
Asset disposal account Dr.
Asset account Cr.
2. Eliminate the provision for depreciation of the disposed asset
Provision for depreciation account Dr.
Asset disposal account Cr.
3. Any cost on asset disposal
Asset disposal account Dr.
Cash Cr.
4. Cash received on disposal
Cash Dr.
Asset disposal account Cr

 Finally the balance in the asset disposal account will be transferred to the profit and
Loss account.

Change in useful life, residual value, depreciation method or cost of an asset

Steps
1) find net book value
2) Add new cost
3) Deduct residual value
4) divide by new or remaining useful life

Lakshitha Rathnayake Page 25

 SLFRS 16 – Leases

Right to Control the use of an Asset

LESSOR
LESSEE Rentals

Lessor - The party who transfers right to control the use of an asset in a lease contract
Lessee - The party who obtains the right to control the use of an asset in a lease
contract

Accounting for Leases in the Books of Lessee

 SLFRS 16 Do not apply for:
a) Short-term leases (a lease that, at the commencement date, has a lease term of 12
months or less)
b) Leases for which the underlying asset is of low value.

Accounting treatment for above two situations:

Lease Rental Dr
Cash Cr

Initial Recognition - Right of use Asset

 Measure the right of use asset at cost at the commencement date

 The cost of the right or use asset comprises:
 the amount of the initial measurement of the lease liability
 any lease payments made at or before the commencement date, less any lease
incentives received.
 Any initial direct costs incurred by the lessee
 An estimate of costs to be incurred by the lessee in dismantling and removing the
underlying asset, restoring the site on which it is located or restoring the
underlying asset to the condition required by the terms and conditions of the lease,
unless those costs are incurred to produce inventories.

Initial Recognition – Lease Liability

 Measure the lease liability at the present value of the lease payments that are not
paid at the commencement date.
 The lease payments are discounted using the interest rate implicit in the lease (If
readily determinable)
 Lease payments included:
 Fixed payments less any lease incentives receivable
 Variable lease payments that depend on an index or a rate.
 Amounts expected to be payable by the lessee under residual value guarantees.
 The exercise price of a purchase option of the lessee is reasonably certain to
exercise that option.
 Payments of penalties for terminating the lease, if the lease term reflects the lessee
exercising an option to terminate the lease.

Lakshitha Rathnayake Page 26

Depreciation (finance Lease)
If Ownership is transferred at the end of lease period Using useful life
If Ownership is not transferred at the end of lease period lease period

The accounting for the lease in the books of the lessee.

 Initial deposit value / Down payment
Right of use asset Dr xxx
Cash account Cr xxx
 Present value of minimum lease payment
Right of use asset Dr xxx
Lease Liability account Cr xxx
 Interest on lease at the end of the period
Interest on lease account Dr xxx
Lease Liability account Cr xxx
 Payment of installment
Lease Liability account Dr xxx
Cash account Cr xxx

Classify Final Lease Liability as current and non current

Current Liability = Installment – Next year Interest

Final Lease Liability

Non Current Liability = Final lease liability – Current
portion

Format of a Lease Liability account

Lease Liability
initial lease liability xxx
Installment xxx Interest xxx
BCD xxx
xxx xxx

Final Lease Liability

Example with workings

Supun PLC acquired a machine on lease basis on 01.04.2019. The following information is
provided.
 Initial payment on 01.04.2019 - Rs. 500 000
 Annual installment - Rs. 200 000 (starting from 01.04.2019)
 Lease term - 4 years
 Initial direct cost incurred on 01.04.2019 by the lessee - Rs. 10 000
 The interest rate implicit the lease - 10%
 Discounting factors at 10% rate.
 Residual value - Rs. 143 800
 Useful life of the machine - 5 years
 The ownership of the machine will be transferred to Supun PLC at the end of 5 th
year.

Lakshitha Rathnayake Page 27

 Year : 1 2 3 4
Discount factor : 0.909 0.826 0.751 0.683

Useful life of the machine - 5 years

Residual value - 50 000
The ownership of the machine will be transferred to Supun PLC at the end of the lease
term.

Required to Calculate:
1. The amount of the lease liability
2. The amount to be recognized as right of use asset
3. Prepare lease liability account for the year ended 31.03.2020
4. Prepare financial statement extracts for the year ended 31.03.2020

Answer
1. Year : 1 2 3 4
Discount factor : 0.909 0.826 0.751 0.683
Lease installment : 200,000 200,000 200,000 200,000
Present value : 181,800 165,200 150,200 136,600
Initial lease liability : 633,800

2. Right of use asset

Initial payment 500,000
(+) present value 633,800
(+) Initail Direct cost 10,000
1,143,800

3. Lease Liability
initial lease liability 633,800
Installment 200,000 Interest 63,380
BCD 497,180
697180 697180

Final Lease Liability

4. I/S extract Distribution expense

Right of use asset depreciation 200,000
Finance expence
Interest 63,380
SOFP extract Non Current Assets
Right of use asset 943,800
Non Current liability
Lease Liability 346,898
Current liability
Lease Liability 150,282

Current Liability = Installment – Next year Interest

150,282 = 200,000 - 49,718
Final Lease Liability
Non Current Liability = Final lease liability – Current
portion
346,898 = 497,180 - 150,282

Lakshitha Rathnayake Page 28

 SLFRS 15 – Revenue from Contracts with Customers

Main Features of SLFRS 15

 Introduces a Five Steps Revenue Model (COPAR)
 Five Steps Revenue Model

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Identify the Identify the Determine Allocate the Recognize
Contract(s) Performance the transaction Revenue
With the Obligations transaction Price When a
Customer In the price Between performane
Contracts Performances obligation
Obligations is satisfied

Five Steps Revenue Model

Eg-: ABC PLC signed a contract to sell a machine to XYZ PLC and provide one year service
contract for 30 million on 01/01/2019. The machine was delivered on 01.04.2019 and service
started on 30/09/2019. The machine is usually sold without the service for 24 million and
service is separately performed for 6 million. Full contract price was received on 01/04/2019.
Accounting year ends on 31.03.2020

STEP 1
Contract - is an written, oral or implied agreement between 2 or more parties which create
rights and obligations and it should be a legally enforceable.
Eg- ABC PLC came to an agreement to deliver a machine and provide service.

STEP 2
Performance Obligations - A promise to transfer a good/service
Eg- There are two performance obligations in this example
1. Supply of machine
2. Provide one year service

STEP 3
Transaction price – The amount of consideration which an entity expects to receive from a
customer in exchange for transferring promissed goods or service.
Eg- 30 million

STEP 4
Allocate - Transaction price should be allocated based on stand alone selling prices of each
obligation.
Eg-
Performance obligation Standalone selling price Allocated price
1. Supply of machine 24 million 24 million
2. Provide one year service 6 million 6 million
Total 30 million 30 million
(in this example there is no discount, therefore standalone selling price and allocated
price between two performance obligations are equal.)

Lakshitha Rathnayake Page 29

STEP 5
Recognize Revenue - An entity recognizes revenue when it satisfies the performance
obligation by transferring promised goods or service to a customer.
Eg- Recognize 24 million sales revenue on 01/04/2019 ( when the machine is delivered)
Recognize 3 million service revenue on 31/03/2020 (for the services already provided –
6million x 6/12)

Exercise 01
PQR PLC signed a contract to sell a machine to XYZ PLC and provide one year service
contract for 25 million on 01/01/2019. The machine was delivered on 01.04.2019 and service
started on 30/09/2019. The machine is usually sold without the service for 24 million and
service is separately performed for 6 million. Full contract price was received on 01/04/2019.
Required
1. Performance obligations to be recognized?
2. Transaction price ?
3. Total Discount amount?
4. Allocate the transaction price among performance obligations?
5. Journal entries

Answers

1) i) There are two performance obligations

1. Supply of machine
2. Provide one year service
2) 25 million
3) Standalone selling price - Transaction price = Total discount amount
30 million - 25 million = 5 million

Performance obligation Standalone selling price Allocated price

1. Supply of machine 24 million 25 x (4/5) = 20 million
2. Provide one year service 6 million 25 x (1/5) = 5 million
Total 30 million 25 million
4)

5) Journal entries
i) when transaction price is received
Cash Dr 25 million
Unearned revenue Cr 25 million

ii) when machine is delivered

Unearned revenue Dr 20 million
Sales revenue Cr 20 million

iii) Services already provided as at 31.03.2020

Unearned revenue Dr 2.5 million
Service revenue Cr 2.5 million

Lakshitha Rathnayake Page 30

 LKAS 37
Provision (Adjusted in financial statements)
Eg: Provision for warranty Only liability provisions
Provision for compensation Are considered in LKAS 37

Provision is a liability of uncertain timing or amount. Legal or constructive obligation.

Characteristics: Present obligation ( Legal or constructive obligation).

Reliable estimate
Probable outflow

Legal obligations may arise due to

 Operations of contractual law
 Operations of provisions in parliaments acts or
 Operations of other law

constructive obligation may arise due to

 established pattern of past practice, published policies or a sufficiently specific current
statement, the entity has indicated to other parties that it will accept certain responsibilities
and,
 as a result, a valid expectations created by entity on the part of those other parties that it
will discharge those responsibilities.

Contingent liability(Disclose as a note)

A possible obligation that arises from past events and whose existence will be confirmed
only by the occurrence or non occurrence of one or more uncertain future events not
wholly within the control of the entity.

Characteristics: possible obligation

Cannot estimate reliably

Future Liability

probable possible Remote

make a Provision Contingent Liabilit(disclose) no need to disclose

Contingent Assets
Possible asset that arises from past events whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within
the control of the entity.

Contingent Assets Could not be recognized as an asset in the statement of financial position.
Disclose only if there is a probability of an inflow of economic benefit.

Lakshitha Rathnayake Page 31

Unit 12 – Limited company
Differences
Bonus issue/capitalization or reserves Right issue
Impact on cash No change Cash increase
Impact on Equity No change Equity increase

Bonus issue Reserve Account Dr. xx

Share Capital Cr. Xx
Share issue

1) Receipts of cash with applications

Cash Dr
Share issue Cr
2) Rejection of applications or excess money
Share issue Dr
Cash Cr
3) Allotment of shares or capitalization of shares
Share issue Dr
Share capital Cr
4) Share issue expenses
Share issue expense Dr
Cash Cr

Total income Total Expense

 Sales Cost of sales
 Other income  Other expenses
 Revaluation gain  Revaluation loss

Total = profit for the year + Other Comprehensive income

Comprehensive income
Total Comprehensive income = Total income - Total expense

First time revaluation gain and subsequent revaluation loss

Cost first time revalued Subsequent revalued

amount amount
1000 1500 800

Asset Dr 500 Revaluation reserve Dr 500

Revaluation reserve Cr 500 P&L Dr 200
Asset Cr 700
First time revaluation gain and subsequent revaluation loss

Cost first time revalued Subsequent revalued

amount amount
1000 700 1,500

P & L (other expense) Dr 300 Asset Dr 800

Asset Cr 300 P&L Cr 300
Revaluation reserve Cr 500
Lakshitha Rathnayake Page 32
Unit 13 – Accounting ratios
Profitability Ratios

Gross Profit Ratio = Gross profit X 100

Sales

To GP ratio S.P COS

Change in Inventory valuation policy (FIFO is more
suitable)
In an inflationary Situation

FIFO Closing Stock C.O.S G.P

(Current Revenue is compared with the historical cost)

Net Profit Ratio = Net profit after tax X 100

Sales

Return on Equity = Net profit after tax X 100

Equity

Return on Assets = Net profit after tax + Interest X 100

Total assets

Liquidity Ratios
Current assets
Current ratio =
Current liabilities
Liquid assets
Quick ratio =
Current liabilities
Liquid assets = Total current assets - (closing inventory + Pre-payments)

Leverage ratios

Debt Ratio = Debt capital x 100

Total capital

Debt capital = Long term loans with fixed interest rate

Total capital = Ordinary share capital + Reserves + Long term loans

Equity Ratio = Equity capital x 100

Total capital

Equity capital = Ordinary share capital + reserves

Lakshitha Rathnayake Page 33

 Debt to Equity Ratio = Debt capital : Equity capital
or
Debt to Equity ratio = Debt
Equity

Profit before tax + interest

Interest Coverage Ratio =
Interest
Efficiency ratios
Inventory Turnover Ratio = Cost of sales
Average Inventory

Inventory residence period = Average Inventory x 365 days

Cost of sales

Debtors Turnover Ratio = Credit sales

Average Debtors

Debtors Collection period = Average Debtors x 365 days

Credit sales

Assets turnover Ratio = Total sales

Total assets

Relationship between turnover ratio and residence/collection period

inventory turnover inventory residence period favorable situation

debtors turnover Debtors collection period favorable situation

Investors' ratios

Profit for the year

Earnings per share =
Number of Ordinary Shares

Dividends for ordinary shares for the year

Dividend per share =
Number of Ordinary Shares

Cash cycle = Inventory residence + Debtors collection - Creditors payment

Period period Period

Lakshitha Rathnayake Page 34

Unit 14- Cost Accounting
Cost unit - Any activity for which a separate measurement of cost is required is known as
cost unit/cost object

VC

Fixed Cost & AFC

AVC

TC or Semi variable cost

Material purchasing process

Productio Stores Purchase

n Dept. DEPT
MRN/SRN
Dept.
PRN PRN
MIN

GRN(copy)

GRN

GRN(copy) Delivery note PO

Accounti
ng Dept.

PV/Invoice/ Cheque counterfoil

SUPPLIER

Lakshitha Rathnayake Page 35

EOQ Assumptions
-Annual demand constant
-Holding cost per unit constant
-Cost per order is constant

Annual ordering Cost = cost per order X No of order

Annual Holding Cost = Average inventory X Holding cost per unit

EOQ X 50%

EOQ = 2DCo
Ch

Re –order level = maximum consumption X maximum lead time

Minimum stock level = Re order level – (Average consumption x average lead time)
Maximum stock level = ROL – (Minimum consumption x Minimum lead time) +EOQ
Average stock level = Minimum stock level + Economic order Quantity
2
Or
Average stock level = Minimum stock level + Maximum stock level
2

Differences

Bin Card Stores Ledger

Quantity Only Value and Quantity
Maintain the stores Maintain in the accounts department

Labour records

Active Time Retaining Time

Job ticket Attendance Register
Job cost sheet Cards with bar codes
Daily time sheet Finger printer machine

Documents required to prepare Pay sheet

Appointment letter
Time sheet
Attendance register

Lakshitha Rathnayake Page 36

Journal entries relevant for Labour costing

1) Recording of Gross salary

Salaries and wages Dr
Salaries and wages control Cr
2) Deduction from salaries / wages
Salaries and wages control Dr
Relevant deduction account Cr
3) Payment of net salary
Salaries and wages control Dr
Cash Cr
4) Employer’s contribution for the EPF (Employees Provident Fund)
EPF expense Dr
EPF payable Cr
5) Employer’s contribution for the ETF (Employees Trust Fund)
ETF expense Dr
ETF payable Cr

Employee related total Expense = Gross salary + EPF by employer + ETF by employer

Direct Wages = Production employee related total Expense – (bonus based on Company
Profit + Other allowances)

OAR = Total budgeted Overhead of the relevant production department

Total Budgeted basis

Absorbed Overhead = OAR X Actual Hours (Budgeted will be taken if actual is not given)

Under or (over) absorption = Actual overhead – Absorbed overhead

Different Overhead absorption rates

OAR = Total budgeted Overhead of the relevant production department x 100

(as a % of DM cost) Total Direct material cost

OAR = Total budgeted Overhead of the relevant production department x 100

(as a % of DL cost) Total Direct Labour cost

OAR = Total budgeted Overhead of the relevant production department x 100

(as a % of Prime cost) Total Prime cost

Lakshitha Rathnayake Page 37

Unit 15 – Marginal costing
BEP Assumptions
 Selling price is constant
 Technology constant
 All cost are divided as variable and fixed
 FC does not vary with quantity
 VC vary with quantity, VC per unit is constant at BEP
 Cost and income behavior as linear function

At BEP
 TR = TC
 Profit = O
 Total contribution = TFC
 Contribution Per Unit = AFC.

 Total contribution = TR – VC
Total contribution = TFC + Profit
Total contribution = contribution per unit x no of units

 Contribution per unit = selling price – variable cost per unit

Contribution per unit = AFC + profit per unit
Contribution per unit = Total contribution
No of units
Contribution per unit = change in contribution
Change in quantity
Contribution per unit = change in profit
Change in quantity

 Contribution sales ratio = Total contribution x 100

Total sales
Contribution sales ratio = contribution per unit x 100
Selling price

Change in total cost

 Unit variable cost =
Change in quantity

 Breakeven point (Q) = Total Fixed cost

contribution per unit

 Breakeven point (RS) = BEP (Q) x selling price

Breakeven point (RS) = Total Fixed cost

Contribution to sales ratio

 Margin of safety (Q) = Expected (Q) – BEP (Q)

Margin of safety (RS) = Margin of safety (Q) x selling price

Margin of safety (RS) = Net profit
Contribution to sales ratio

Lakshitha Rathnayake Page 38

  Profit = TR-TC
Profit = Total Contribution - Total Fixed cost
Profit = Margin of safety (Q) x contribution per unit

 Required/ Expected (Q) = Total Fixed cost + Expected profit

contribution per unit

If C/S ratio 40% , VC ratio should be 60%

Break even chart

Profit volume chart

Lakshitha Rathnayake Page 39

 Unit 16 - Investment Appraisal
Money has a time value due
It can generate returns when it is invested

Average net profit after tax

Average rate of return = x 100
Average investment

Average net profit after tax = Total net profit after tax Number of years

Average Investment = (initial investment + scrap value) 2

Payback period months = deficit amount x 12

Next year net cashflow

Assumptions used in investment appraisal

 Initial investment cost should be incurred at the beginning of the investment (in the year
zero).
 Annual cash flows are occurred at the end of each year.
 If there is any cash flow at the beginning of any year, it is occurred at the end of previous
year.

Disadvantages of payback period

It fails to take into account the cash flows earned after the payback period.
It ignores the Time Value of Money (TVM)

Advantages of NPV
Consider time value of money
Consider all the cash flow of investment
Helps to select the investment which increase the owners wealth

Irrelevant Cost
Depreciation (Non cash item)
Market survey (feasibility study) sunk cost)
Interest expense
 Existing working capital

Reasons for increasing NPV

Cash inflows
Cash outflows
Discounting factor
Cost of capital rate/Discount rate (money dep. Rate)

Payback period Net cash flow = Net Profit + Dep

ARR Net Profit = Net Cash flow - Dep

NPV Net Cash flow = Net profit + Dep

Lakshitha Rathnayake Page 40